by the Investmeuv

and the individual are benefited

insurers. eliminates worries
The insuranee
(iii) It improves Efficiency. of property. The care-
destruction
and miseriesof lossesat death and together for better achieve-
free person can devote his body and soul
effciency, but the effeiencie.sof the
ment. It improvesnot only his
masses are also advanced.
protect-
(iv) It helps Economic Progres8. The insurance by
and death,
ing the society from huge losses of damage, destruction masses.
providesan initiative to work hard for the betterement of the
The next factor of economicprogress, the capital, is also inunensel>
provided by the masses. The property, the valuablc assets, the man,
the machine and the society cannot lose Inuch at the disaster.

DEFINITION OF INSURANCE
The donnition of insurance can be made from two points : (i) Fun-
tional Definition and, (ii) Contractual Definition.
Functional Definition
Insurance is a co-operativedevice to sprcad the lot s caused by
a particular risk over a number of persons,who are exposed to it
and who agree to ir sure themselves against the ris" Thus, the
insurance is (a) a CD-operative
deviceto spread the risk; (b) the.
system to spread the risk over a number of persons who are insured
against the risk ; (c) the principle to share the loss of each member
of the society on the basis of probability of loss to their risk ; and (d)
the method to provide security against losses to th insured.
Similarly another definitioncan be given. Insurance is a co-ope-
rative device of distributing losses,falling on an individual or his
family over a large lumber of persons,each bearing a nominal ex-
penditure and feeling secure against heavy loss.
Contractual Definition
Insurance has been defined to be that in which a sum of money
as a premiumis paid in considerationof the insurer's incurring
the risk of paying a large sum upon a given contingency. The insu-
ranee, thus, is a contract whereby (a) rtain sum, called p:emium,
is charged in consideration, (b) again:t the said consideation,
large sum is guaranteed to be paid by "he insurer who ree ived the
premium, (e) the payment will be mac,ein a certain def Clitesum,
i.e., the loss or the policy amount whichevermay be, ant. (d) the
payment is made only upon a contingency. More specifie definition
 8 and Practice
Insurance—principle
be consisting
defined as av(the
followe--lnsurgncemay ingur-
can be given to the other party
to pay
party (the insurer) agrees sum upon a givencontingency (the
a
beneficiary, certain
ed) or his sought.
is
risk) against which insurance
NATURE OF INSURANCE
following characteristics which are, gene-
The insuraneehas the general insurances.
rally, observedin case of life, marine, fire and

1. Sharing of risk
Insurance is a deviceto share the financial losses which might
befall on an individual or his family on the happening of a speci-
fied event. The event may be death of a bread-winner to the family
in the ease of life insurance,marine-perilsin marine insurance, fire
in fire insuranceand other certain events in general insurance, e.go
theft in burglary insurance,accident in motor insurance, etc. The
loss arising from these events it insured are shared by all the insur-
ed in the form of premium.
2. Co-operative Device
The most important feature of every insurance plan is the eo-
operation of large numberof persons who, in effect, agree to share
the financial loss arising due to a partieu1aYrisk which is insured.
Such a group of may be brought together voluntarily or
through publicity or through solicitationof the agents. An insurer
would be unable to compensateall the losses from his own capital.
So, by insuring or underwriting a large number ot persons, be is
able to pay the amountof loss. Like all co-operativedevices, there
is no compulsionhere on anybody to purchase the insurance policy.
3. Value ot risk
The risk is evaluated before insuring to charge the amount of
share of an insured, herein called, considerationor premium. There
are several methodsof evaluation of risks. If there is expectation
of more bigher premium may be charged. So, the probability
of i' calculatedat the timeot insurance.
C at Contingency
The payment is made at a certain eontingeneyinsured. tho
«»ntingeneyoeeurø,payment is made, Since the life insurance eon.
treet i. a eontraet ot eertaiuty, beeau"$the contingency,the death
or tbe expiry term, will certßinjy occur, the payment is certain,
 GENERAL FUNCTIONS
As already mentioned,the functions that will be consi-
deredin this group are not the specific functions primarily
associated with the specific branches of insurance, but
instead are the general functions or, more specifically, the
functions commonto or ancillary to the business of insurance
as a whole. Such general functions may be summarised as
follows :
1. Equitable distribution of loss.
2. Reduction of losses through rating principle.
3. Assistance to business enterprise.
4. Invisible export.
5. Investment.
6. Inspection services.
7. Research and Publicity.
The performance under each of these will now be
explained.
Elements of Insurance
 ( 26 )
EQUITABLEDISTRIBUTION OF Loss :
Tho basic function of 011 typos of insuranco is tho
equitable distribution of loss of ono onto the shouldors of
many, The distribution of loss is said to bo equitoblosimply
because each of tho insureds contributes to the fund on
amount, in tho shape of premium, commensurating tho risk
he introduces. Tho amount of premium is decided by the
insurers and in matters of taking such decision they are
guided by the qualitative and quantitative analysis of a risk.
It is this professional expertise of the insurers that has made
the business of insurance a separate trade and a distinct
economic activity. In matters of risk assessment and
equitable contribution to common fund the insurers indeed
stand alone. Equalising the good risks and bad risks by
means of rating mechanism is infact ensuring the distribution
of loss equitably on to the shoulders of many. The skill
acquired in the quantitative and qualitative assessment of
risk is the professional skill of insurers developed over years
of experienceand purified by the application of statistical
science. Therefore. the cost-utility sacrifice made by a
policy-holder is exactly the sacrifice commensurateto the risk
he introduces. When. therefore, there is a loss, the payment
of compensationis guaranteed by the insurers because such
losses have already been cared for in the fund so developed
by the contributions.

REDUCTIONOF LOSSES :
Insurers by their methods of rating encourage care.
Premium is loaded for bad features and reduced for
good
feåtures. The basis of rating adopted provides
an attractive
financial inducement to the insured to improve
risks. Provi-
sion is there for lower rates and
discounts for Superior
construction, less hazardous processes
and for maintaining
fire fighting appliances. No
claim discount is also provided
in certaincases where there is a
claim free experience. This
functionis actually the practical
application of the previous
function, viz., the equitable distribution of losses.
 26

ASSISTANCE TO BUSINESS ENTERPRISE:

No large scale business could possibly function freely
were it not possible to transfer manyof its risks to insurers.
In the absencoof insurance business, most of tho business.
men would havo been required to put aside some of their
capital resources against the possibility of unforeseenlosses
or contingencies. Insurance safeguards this capital and
makes it free for further development of the business, Apart
fromthis, by meansof quick settlement of claims, insurers
facilitate reinstatementof the business which ultimately
helps in the process of further production,

INVISIBLE EXPORT :
Insurance has immensepotentialityto work as invisible
export of a country by way of providing insurance services
abroad. This may be done either by providing direct insurance
services abroad or by accepting reinsurance from abroad.
Such an export will definitely have a favourable impact on the
balance of payment•ofa country and can indeed assume a
major proportion of the total exportable items.

INVESTMENT :
Insurers by the nature of their business are constantly
receiving sums of money in the form of premiums and much
of this moneywill be requiredto be paid out in the shape of
claims. All such money they receive are not infact required
at a timeand, therefore, in the position of custodians of vast
sums theyare able to investit for earning inteiest in the capi-
tal market. Whilstthe general insurance investment has to
be on short term basis, life funds can necessarily be invested
on long term basis. The investment is usually made on
governmentsecurties,mortgages, industrial loans and shares,
debenturesetc. The Insurancemarket as such is largely relied
uponby commerce and industry as one of the main sources
of investment capital and therefore it obviously contributes
much in the overall economic development of a country.
Elements of Insuroncø
INSPECTION SERVICES :
Insurers, through their inspection and survey services,
assist the insured/public to recognise the extent to which tho
various features contribute to the creation or reduction of
risks by classified statistics which they compile based on the
experience for each trade and type of risk. Highly ski!ted
officials in this departmentor hired professionulsurveyors
enable the insurers to correctly rate the risk proposed. They
also make recommendations as to how risk could be improved.
Such services have a positive impact in the ultimateminimisa.
tion or reduction of national waste.

RESEARCH AND PUBL'CITY :

Insurers also spend money in research and publicity in
creating risk consciousness amongst public which has a far
reaching effect on reduction in national waste.

NOTE :
WHEN THIS CHAPTER HAS BEEN MASTERD, THE
(
STUDENT SHOULD WORK OUT TEST-2 PLEASE SEE
END OF THE BOOK
1. Features of General Contract
All the features of general contract are also applicable to the
fie insurance contract.
(a) Proposal
The proposal for fire insurance can be made either verbally or
in writing. The proposer gives the necessary description of the pru-
perty to be insured. In practice the printed proposal form is
used for the purpose. Introduction, type of properties, value of
properties, construction, occupation,- etc., are the various infor-
mation which are required by the insurer. The answers to these
questions must be completely correct. The assured must dis-
close all the material facts and should observeutmost good faith.
The descriptionof the subjectmatter of insuranceis the basis of
the contract for assessingthe risk and fixing the premium.
(b) Acceptance
On receipt of the proposal form, the insurer will assess the risk.
Sometimes,when the contentsand subject-mattersare not of very
high amount, the insurer may accept on the basis of proposal forms
only. When the subject-mattersis of larger magnitude and where
the hazard involved is of a variable or unknown nature, the insurer
may send his surveyor to survey the property. The
surveyors be.
 and Practice
4
evaluation will consider the
ing expert in the field of insurance
proposal in the light of this report. The unknown proposers are
The insured is
required to submit an evidence Of respectability.
required to submit a certificate from some known and respectableip
person about honesty and integrity. As soon as the proposal
accepted, the assured is informed about the decision.
(c) Commencement of risk

The risk commencesas soon as the contract is completedpro.

vided there is no specifietime for the purpose. As soon as the pro.
posal is accepted,risk will commenceirrespective of the fact that
no policy was issued and no premiumwas paid. Where risks are
urgknownand tremendous,the payment of premium will be the
basis of the completionof the contract. The risk will commence
only when the premium has been paid and not before that ; when the
policy has been issued, payment of premiumwill not be the basis
of commencement of risk.
(i) Cover note : The insurer issuesa 'Cover Note' or 'Interim
Protection Note' when the risk was acceptedprovisionally or sub-
ject to the ,condition of payment of premium. This note will cover
the property so far the final policy has not been issued. If loss
occurs before issue of policy the cover note will be suffcient to
prove insurance. The cover note, however, is not taken at par to
the policy.
 SYSTEM OF RATE FIXATION
The actual processof rating consistsof three steps : (1) Clas•
sifieation, (2) Diurimination and (3) Fixing rates or schedule
rating.
1.
Properties to be insured are of various nature and risk. Since
the premiumis fixed in relation to the class of risk, the properties
are classifiedaccordingly. Properties are generally divided into
three main classes,viz., (i) commonor ordinary, (ii) hazardous and
(iii) doubly hazardous. Different premium rates are fixed for each
elass. These classifications do not hold good for a long time beause
of varied nature of risk. Now the risks are elauißed into various
classes according to factors affecting fire rißk.
(i) or Structure : The construction of the build-
ing has always been of great importancein rating. Building made
of brick will be more sound than the building made of wood. To-
day, the constructionof building is divided into two types of struc-
ture. First fire-proof building and second, building without fire-
proof. The height of the building, the area, the number
Of unpro-
teeted floor openings, construction of walls, floors,
roof, etc., am
eouidered in calculatingthe fire hazard.

382
 *ate Pizatiönin Flee
(ii) The risk considerably varieg according to the
nature of occupancy,i.e., the use to which the building is devoted.
One building may be used as a dry goods store or hardware store,
or furniture-store or for residential purposes. The building may
have different risks because of the different and proew
ses which they contain and the different uses to which they are put.
nere is inherent connectionbetween the building and its eon-
tents. It is essential for companiesto change their rates to meet
chaugmg business conditions. Rate making in fire insurance does
not present constant factors. Justice demands that the insurer
should recognise the important changes. A building occupied as
a residenceor an omceis a better risk than a retail shop.A store-
room used for the storage of highly combustible goods is more hazar-
dous from a fire insurance viewpoint than a grocery shop. The
process of manufacture, the nature of raw materials used, the type
of machinery are important factors to influencethe physical hazard.
(iii) Nature of mooring : The nature ( L flooring influences
the risk to a greater extent. Existenceof woodenfloorsin the
building introduces an additional physical hazard. Wooden floor
becomesa fuel in the event of fire. It may collapseeasily causing
damage to property.
(iv) Height: The height adds diffculty in fighting a fire on
the upper floors. There may be risk of water damage to property
on the lower floors when water is used to extinguish a fire on the
upper floors. The floors involve heavy risk of collapse of the
upper floors.
(v) Floor and "Il openings: Openingsin the floorfor lifts
and belts constitute higher physical hazard. It may eause greater
chancæ of ignition of fire and diffculty of extinguishing the are.
(vi) Exposun: The chances of risk may differ from property
to property accordingto the degree of exposure. A building or
property may be situated in a congestedconflagrati6hlocality in-
volving greater danger to the property. Exposure stands econd
as a cause of fire and is more than the occupancyhazard.
(vii) Heating and Power : The dre may occur due
to short-circuit. Combustioncan algo arise from faulty installaßon
And dampness. The lighting system e.g. by gas or oil, leakage
ot fuel and naked aarnf* cause more hazard to
(viii) Plau or situaUon: The location of the property,
of adjoining premises,the distance from o nature
fire brigade station or
 annrnce—PrineiplJ8 and Prae*e
3
e source of water supply, the degree of congestionin tbe area are
someof the important factors to influencethe degree of risk.
(ix) Protection : The availability of protection against fire
influences the degree of risk. The protection facilities may b.
public or private. When protection facilities are available the fre
may be extinguished in its incipiency. The fire extinguishing
apparatus, water supply, police system etc. can reduce the
degree of risk. Smaller premium is charged where modern deviees
for preventing and extinguishing fires are present. It would be
injustice to charge the same rate for all types of risk.
Time: The time of loss must be kept into consideration.
The annual loss ratio is by no means uniform every year. So,
the rate fixationmust accountfor goodor bad years to determine
approximately the real loss. Therefore,a long period of time
taken into consideration while calculating the premium.

2. Discriminaåon
The differentiationof the rates for individualrisks in a parti-
eular class is known as discrimination. Each additional feature
of risk is charged extra premium. The better types of risks are
encouraged and attracted by the insurer. Lesser premium is
charged where fire extinguishing appliances or fire-resisting con-
struction are present. The tariff system is based on the law of
average and graded schedule is formulated where different rates
are ascertained for the different types of risks. Thus, the different
risks are put in a specifiedclass, and are differentiated from each
other accordingto the merits and demerits of the individual risk.
It aims at a more equitable basis of rating. For example, dwelling
house is a class and, therefore, all the dwellinghouses are put in
the same class. Since the dwelling houses are of different types,
the elass may be sub-divided into several classes according to the
degree of hazard. An appropriate discount could be given for
houses which have fire extinguishing appliances, nearness to are
brigade station and absence of exposure in the vicinity.

3. SobeduL Raung
Lt i. u plan by which hazard' with repeat to any par&uLr
m—ured. It iø an empirical btan•
the Jneti%ureruent of relative quantity of Are bagard.
rating taken into eonaiderationthe various items innuene•
 note Fire Inegeaøæ
ing the peril of fire. It is based on the theory that the aggregate
fire hazard of any risk is capable of ultimate analysis into it'
componentfactors to each of could be assigned an appro-
priate charge. A standard or average premium is determined as
a base for calculating the premium. The average premium rate
for a class of risk is determinedtaking into accountthe total lw
and the sums assured during a period of years. The period
should be such that the experienceof good as well as bad years
may be taken into account. A large number of items, as far as
possible,are taken so that the law of average may apply. Larger
the number, the more representativewill be the ratc of premium.
Thus the average fire rate is calculated as follows:
L/V X 100
Where L represents the losses, and V represents the values
of insured amount.
The rate arrived at will be net permiumwhich is just sum-
cient to meet all the lossesin that particular risk. This basic or
net premium is loaded with expensesof management,commission,
rents and a margin for profit to arrive at the gross premium or
omee premium.
The rate so calculated is called 'normal rate' or average rate for
the particular group. In each group, risks may differ from one
another and in order to maintaiq equity between different types of
risk and between the insurer and the insured, it is necessary to
apply the principle of discrimination,i.e., differentiation,of indivi•
dual risks in a group taking into account their particular features.
Extra rates are provided for bad featuræ, i.e., for inferior eons-
timber flooring, height, situation in a congested area and
discounts are granted for good features, i.e., for fire extinguish-
ing appliances, automatic sprinklers etc. The rebate will be
allowed taking into account the emcacy of the means adopted.
PRINCIPLES or RATE FIXATION
The fire insurance rates are determined by three ways : (l) per.
sonal judgement, (2) tabulated experience and (3) by schedule.
(1) Personal
This method wag the first to bo
method, the rateg go made indicate generally used. Under this
tbe rate makem. The judgement the opinion or judgement of
and is the result of thr p
of many yean. fie xpetiencp
rate madc were equi!8ble
 BateFintbn in Inegranee 387
proper eon\truetion of buildinn by intelligently.charging
f
for de.
standards and recognizing exceptionally good
cönS•
truetion by uotions. The fourth advantageis that it secures
more thorough inspection and rating.
ef*RIFF RATES
Fire insurance business is governed by the tariffs formulated
by the Tariff Advisory Committeewhich is a statutory bodyatab•
lished under the provisions of the Insurance (Amendment)Aet
1968 "to control and regulate the rates, advantages, terms and
conditions that may be offered by insurers in respect of general
insurance business. The Tariffs provide rates of premium for
almost all classes of risks as also rule' and regulations govern-
ing the business and standard form of wordings for the con.
tract and its extensions. The Tariff Advisory Committee has
constituted four Regional Committees at Delhi, Calcutta, Madras
and Bombay.
The States of Jammu and Kashmir,Punjab, Haryana,
Rajasthan, Uttar Pradesh, Himachal Pradesh and the Union Ter.
ritories of Delhi.
Calcutta : The States of Assam, Bihar, Orissa, West Bengal
and the Union Territories of Andaman and Nicobar Islands, Mani-
pur and Tripura.
Ldras : The States of Andhra Pradesh, Kerala, Tamil Nadu
Laceadiv,Minieoy
and Karnataka and the Union Territories of
and Amindive Islands.
Madhya
Bombay The States of Gujarat, Maharashtra and
Pradesh.
for rates, warrantie
Each region has its own Tariff providing
and other regulationsapplicableto risks situatedin its territorial
applicableto each of the regions are
jurisdiction. The Tariffs
in matters of detail such as.actual
similar in broad outline but differ
and past experience of the area.
rate which reflect local hazards
Thue Tariffs are formulated by applying the principles of fire in.
surance rating discussed earlier. Risks are classified into principal
groups and rates are provided for each group on the basis of loss
experience of each such group. After classification,diu•rimination
is another feature of the tariff systemof rating. In the same goup
of risks, there will be differencesin the circumstancesof individual
risks. The differences are dealt with by charging extra